Archive - Feb 2014 - Story

Stocks are confused. The FOMC Minutes, which clarified that a) taper is on (no matter what almost), and b) forward guidance has been replaced by some fluffy words; have sent the USD higher, bond yields higher, and precious metals lower in 'classic' un-taper unwind mode. Stocks are holding (for now) as the USD strength (and implicit JPY weakness) is supporting US equities via the idiocy of the carry trade. VIX remains well bid and credit markets are blowing wider.

Perhaps the most important line in today's FOMC minutes:

... Several participants suggested that risks to financial stability should appear more explicitly in the list of factors that would guide decisions about the federal funds rate once the unemployment rate threshold is crossed...

What this means is that since the Fed's legacy forward guidance of a 6.5% unemployment threshold is dead and buried (and will become a non-factor as soon as next month when unemployment could fall well below this red line), what the Fed is now suggesting is that the Fed will "qualitatively" guide to more intangible factors: like "risks to financial stability" better known as the prevailing level of the S&P 500. In short, is the Fed about to admit that screw inflation and screw unemployment, it was all about the S&P 500 and making the rich richer all along?

The US is adding its $0.02 to the international condemnation of the actions under way in Ukraine - desparate to re-write Victoria Nuland's narrative of "f##k the EUR" and political manipulation. President Obama, having not learned his lesson the last time he drew a red line, has come out swinging: OBAMA:`THERE WILL BE CONSEQUENCES IF PEOPLE STEP OVER THE LINE'; OBAMA SAYS U.S. CONDEMNS UKRAINE VIOLENCE IN `STRONGEST TERMS'; OBAMA:MILITARY SHOULDN'T ACT WHERE CIVILIANS CAN RESOLVE ISSUES. Of course, it's unclear if open military action against civilians is 'crossing the line' but we await Putin's response.

With a plethora of Fed speakers playing good cop, bad cop todasy, it is hardly surprising that the FOMC minutes (as adulterated as they are) still show disagreement...

• *SEVERAL FOMC PARTICIPANTS SAID TEMPORARY FACTORS SPURRED GROWTH
• *FED TO CHANGE RATE GUIDANCE AS UNEMPLOYMENT FALLS, MINUTES SHOW
• *SOME FOMC PARTICIPANTS FAVORED `QUALITATIVE GUIDANCE'
• *SEVERAL PARTICIPANTS FAVORED $10 BILLION QE TAPER PER MEETING

The bottom-line is that the Fed is very confused and while headlines will crow of communication and forward-guidance, it is clear they are winging it now as "qualitative" guidance is the new way forward.

Bank of America expects the FOMC minutes to reveal broad support for the continuation of "measured" tapering, with general discussion around what conditions might lead the FOMC to deviate from a $10bn per month pace, but few, if any, specifics. A small number of Fed officials are likely to express worry about the costs and efficacy of QE, but the majority should see those as less important and focus on signs of continued recovery in the labor market. Forward guidance is likely to have less agreement, with a few members supporting reducing the unemployment threshold, a few favoring no change at all, and several supporting a shift toward a more qualitative approach. We expect the FOMC to drop the unemployment threshold and introduce vaguer but more robust qualitative guidance at their March meeting.

Even before Fed's Williams poured cold water on un-taper hopes, it seems new highs in US stocks were being aggressively protected in the options markets. Today the divergence between an exuberant stock market and a defensive options market (VIX) is getting extreme... With the S&P and Russell having achieved their technical goal of 'unchanged' year-to-date, it appears the BTFATH'ers have left the building for a moment.

As we observed yesterday, the market action over the past weeks can be summarized with one word: untaper. Specifically, in light of recent data, the Koolaid addicts had hoped that the crunch in the economy would be sufficient for the Fed to taper the taper, and slow down its removal of crutches, which ironically means that the media should have been focusing on the real causes of the winter swoon - i.e., the tapped out consumer and not blaming snow in the winter. Alas, for all those who had hoped that Yellen would promptly shift to Untaper mode, Fed uber dove Williams has just one present: a glass of (appropriately) ice cold water.

In the last year, China has increased the military activity and actions in the South China Sea around the so-called Nine Dash Line — China’s expansive claim into the region which is in conflict with several other international claims. As USNI reports, Capt. James Fannell, deputy chief of staff intelligence and information operations for PACFLEET, notes that while China has long trained for an amphibious invasion of Taiwan during military exercises but has expanded its training to include a similar attack on Japanese holdings in the East China Sea. He concludes, "the PLA has been given the new task to be able to conduct a short sharp war to destroy Japanese forces in the East China Sea following with what can only be expected a seizure of the Senkakus or even a southern Ryukyu [islands]."

Now that we have the full history of foreign Treasury purchases in 2013, we know the following: in December 2012 total US paper held by foreigners was $5,573.8 billion; one year later it rose to $5.794.9 billion or a $221 billion increase. So how does this look in the context of QE? In the past year, courtesy of the Fed's $1 trillion in TSY and MBS purchases, Ben Bernanke purchases some $552 billion in Treasurys, or about 150% more than all foreigners combined! Suddenly the need for MyRA is becoming all too clear...

Just as we warned earlier, the stealing of the weapons cache and labeling of the break-away region as having undertaken "terrorist acts" has led to the military getting involved:

• *UKRAINE ARMY GIVEN POWER TO CHECK CIVILIAN VEHICLES
• *UKRAINE ARMY GIVEN POWER TO USE WEAPONS ON UKRAINIANS: MINISTRY

Under the "anti-terrorist" operation, Ukraine is a close to civil war as it has been so far. As Martin Armstrong concludes: "there is no peaceful resolution" no matter how many sanctions and condemnations the West makes.

With the Winter Olympics underway in Sochi, Russia is again in the global spotlight – and President Vladimir Putin is taking the opportunity to present his country as a resurgent power. But, beneath the swagger and fanfare lie serious doubts about Russia’s future. In fact, long-term price trends for the mineral resources upon which the economy depends, together with Russia’s history (especially the last two decades of Soviet rule), suggest that Putin’s luck may well be about to run out.

"Victory" This morning's USDJPY 102 stick-save was just the momentum ignition required to send the Russell 2000 and S&P 500 to critical 'unchanged' levels... "Mission Accomplished"... The Dow and Trannies remain down over 2% as the Nasdaq leads the way up 2.4% on the year. It would seem that despite 'economists' proclamations that the terrible maco data is 'weather' driven (and this transitory), they are also seeing it as bad news... which is - in our new normal - great news for liquidity-fueled bubbles (which the Fed will remind us later in the Minutes do not exist). US Macro data has plunged to six-month lows.

Extortion and skimming create their own antidotes. As the costs of skimming, extortion and corruption reach new heights, the savings to be gained by bypassing the Status Quo systems also increase. The problem is its own solution. Whether we try to stop the Status Quo, or let it stop, it WILL stop. Debt and other state-cartel schemes enclose and imprison the bottom 90% while leaving the illusions of liberty, democracy and "prosperity" intact so the debt-serf inhabitants of the home-country neocolonial plantations love their servitude. The incentives to escape the home-country plantation are rising in parallel with the skimming of the state-cartel Elites.